How to choose funding option for startup

I have been getting many questions about startup funding; I thought it is worth to write an article about types of funding and how to choose startup funding option. Funding plays a vital role to drive a startup, the majority of budding entrepreneurs usually in confusion about various options for funding and which option is the best fit for their startup. What are basics of funding? What is the right time to raise funds? How much is needed to run the show? How much equity has to be shared?.

Venture capital:

Essentially, venture capital company is much bigger than a startup; these guys usually look for more significant opportunity. Startup should be in a matured stage and have good revenues coming in. Every venture capital usually has some specified portfolios to invest; they focus only on returns and overall company performance. These guys often travel for some time to make money and exit. However, venture capital companies may not be interested if the time crosses more than five years for a return on investment (ROI). Apparently, one of the guys from venture capital firm will occupy a seat on the board of directors.

When you are prepared to raise funds from venture capitalist remember 2 things 1. You should have a strong business model, realistic sales projections, healthy revenues and strong team 2. Be prepared to lose some control on the venture as well.

This funding is suitable for:

The startup which is already performing well.

A real potential team with good experience.

Ready to lose some control.

Bank Loan:

Banks usually go based on balance sheets rather than projections. Bank trust current revenue rather than unrealistic projections. These guys go by a set of policies rather than an idea.

The basic business of a bank is lending money for interest, essentially these guys always like to keep less risk and they believe in minimum 80% of recovery in the worst case scenario, it could be your Capex or personal assets.

If you don’t have the balance sheet and history of business, you will end up by providing collateral property. The biggest advantage of bank loan is: They don’t expect any equity, a bank loan is the best option than any other funds as long as you are confident about your idea.

This funding is suitable for:

The startup is already performing well and needs a small amount to expand.

The best option for steady growth.

Crowdfunding:

Crowdfund is a method of raising funds from a bigger crowd. I would say it is the effective way to raise startup funding and benefit in the long run. Crowdfunding allows individuals the opportunity to invest on a larger scale. It allows you to build 40 times more than company assets.

Bootstrapping as the first option for startup funding:

Bootstrapping means funds from your pocket, it is the easiest way to acquire funds for your startup. Usually, it can be from your liquid savings, selling a property, getting a loan on your assets. To my knowledge, your business is more worth if you don’t raise funds from outside. However, you have to have self-control and discipline. Perhaps you lose control in spending as you are not accountable to anyone. The biggest advantage is you are the boss.

This funding is suitable for:

Who is self-sufficient and have some assets to make the risk.

When venture doesn’t demand much investment.

When you can create good revenues with small money.

Angel Investor:

Opting an angle investor is the next easy option as you need to convince one person to flow funds. I would say it is just as good as borrowing money from other person or a smaller party. The capital they provide can be one-time injection or ongoing support.

The majority of the angle investors would travel along with you. Sometimes they can be an excellent resource for guidance. Usually, they opt for equity rather than exit policy. Angel investors invest their own money or pool of money from others in a professional way.